LPG Pricing [UPSC Current Affairs]

In early 2023, oil marketing corporations raised the price of domestic and commercial liquefied petroleum gas cylinders by ₹50 and ₹350 respectively. What is the reason for such hikes? How does it impact the Indian economy? Get answers to all these questions in this article. This is a relevant topic for the IAS exam Indian economy segment.

How are Liquid Petroleum Gas (LPG) Cylinders Priced?

India imports almost half of the LPG demand in the country and the balance demand is met by production within the country itself.

• The LPG prices are predominantly decided based on LPG prices in the global market and a mechanism called Import Parity Price (IPP) is used for price determination.
• The formula for import parity price assumes that LPG is imported within the country.
• Import Parity Price is based on Saudi Aramco’s LPG price and includes costs such as:
  • FOB (Free on Board) price
  • Custom Duty
  • Insurance
  • Ocean Freight Price
  • Port costs, etc     
• The above costs are quoted in dollars and converted to rupees.
• Other prices include:  
  • Goods and Service Tax (GST)  
  • Bottling charges        
  • Inland logistic cost
  • Dealer commission
  • Marketing cost
  • Margins charged by OMC
• The above costs give the retail selling price of an unsubsidised LPG cylinder.
• The oil corporations are empowered to change prices every month. 

Factors that Influence LPG Price

The major factors that influence LPG prices are:

• An increase in the international price of LPG will increase LPG prices in India.
• The depreciation of the rupee will also increase LPG prices in India.
• Geopolitical tensions such as the Ukraine-Russia war also tend to increase LPG and crude prices.  
• Global LPG prices generally move in tandem with crude oil prices which is a key raw material.
• Consumers get up to 12 subsidized cylinders under the Pradhan Mantri Ujjwala Yojana, hence government procurement also influences the price of LPG.

Issues with LPG Pricing:  

• Whether IPP or import parity price mechanism is suitable for determining LPG prices is debatable.
• Allegations of cartelisation by oil and gas-producing corporations are also an issue that leads to a rise in prices. 
• All the dominant state-owned OMCs charge similar prices for LPG despite having different structures and operating models.

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